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Federal Reserve Leaves Key Rate Unchanged

changzheng49 by changzheng49
14/05/2025
in News
Federal Reserve Leaves Key Rate Unchanged
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WASHINGTON, (AP) — In a significant decision on Wednesday, the Federal Reserve opted to maintain its key interest rate, disregarding President Donald Trump’s repeated calls for a reduction in borrowing costs. The central bank‘s move comes at a time when it faces an unusual conundrum: the simultaneous rise in the risks of higher unemployment and higher inflation, a situation that places it in a precarious position.

The Fed kept its rate at 4.3%, marking the third consecutive meeting with no change, after a series of three rate cuts at the end of the previous year. Despite this hold, many economists and Wall Street investors anticipate that the Fed will still cut rates this year. The sweeping tariffs imposed by Trump have introduced a substantial level of uncertainty into both the U.S. economy and the Fed’s policy – making process. During a post – policy – statement press conference, Fed Chair Jerome Powell emphasized that while the tariffs have dampened consumer and business sentiment, they have not yet significantly damaged the economy. However, he also noted that the current situation is so uncertain that it’s difficult to determine how the Fed should respond to the tariffs.

Powell warned that if the announced large increases in tariffs are sustained, they are likely to lead to a rise in inflation, a slowdown in economic growth, and an increase in unemployment. He added that these impacts could be either temporary or long – lasting. “There’s just so much that we don’t know,” Powell said. “We’re in a good position to wait and see.” This situation is particularly unusual for the Fed because typically, higher inflation and higher unemployment occur under different economic circumstances. A combination of both, often referred to as “stagflation,” is a nightmare scenario for central bankers, as it is extremely challenging to address both issues simultaneously. The last time stagflation occurred on a sustained basis was during the oil shocks and recessions of the 1970s.

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Most economists agree that Trump’s tariffs pose a real threat of stagflation. The import taxes could drive up inflation by making imported parts and finished goods more expensive. At the same time, as companies’ costs rise due to the tariffs, they may be forced to cut jobs, leading to higher unemployment. The Fed’s dual mandate is to maintain price stability and maximize employment. Usually, when inflation rises, the Fed raises rates to slow down borrowing and spending, thereby cooling inflation. Conversely, if layoffs increase, it cuts rates to stimulate more spending and economic growth. At the start of the year, analysts and investors expected the Fed to cut its key rate two or three times this year as the post – pandemic inflation spike continued to ease. Some economists also believed that the Fed should pre – emptively cut rates in anticipation of slower growth and worsening unemployment due to the tariffs. But Powell was firm in his stance that with the economy in good shape for the moment, the Fed can afford to take a wait – and – see approach.

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Several months ago, many analysts had high hopes for a “soft landing” for the economy, where inflation would gradually drop back to the 2% target while unemployment remained low during solid economic growth. However, Powell dampened these expectations on Wednesday. He stated that if the tariffs are ultimately implemented at the proposed levels, the Fed will not see further progress towards its goals. “At least for the next, let’s say, year, we would not be making progress toward those goals — again, if that’s the way the tariffs shake out,” he said. Powell also indicated that the Fed’s next move will depend on which of the two indicators, inflation or unemployment, worsens more severely. “Depending on how things play out, it could include rate cuts, it could include us holding where we are, we just need to see how things play out before we make those decisions,” he explained.

Krishna Guha, an analyst at EvercoreISI, believes that the Fed’s assessment of the current situation is likely to delay the expected rate cut. “The combination of the two – sided risk assessment and the characterization of the economy as solid suggest the (Fed) is not looking to tee up a June cut at this juncture,” Guha said. Many economists now think the Fed may not be ready to cut rates until September. Trump’s tariff actions, which began with announcements against about 60 U.S. trading partners in April and then a 90 – day pause for most, except for those against China (where goods face a 145% tariff), have set the stage for potential conflict between the Fed and the Trump administration. Trump again urged the Fed to cut rates during a television interview on Sunday. Although he has backed off from threats to fire Powell, he could potentially reconsider if the economy takes a turn for the worse in the coming months. When asked at the press conference about the influence of Trump’s calls for lower rates, Powell firmly stated, “(It) doesn’t affect doing our job at all. We’re always going to consider only the economic data, the outlook, the balance of risks, and that’s it.”

Another major concern for the Fed is the impact of tariffs on inflation. While nearly all economists and Fed officials expect the import taxes to increase prices, the extent and duration of this price increase remain uncertain. Tariffs typically cause a one – time jump in prices, but they do not necessarily lead to continuous inflation. For now, the U.S. economy appears to be in relatively good shape, with inflation having cooled significantly from its 2022 peak. Consumers are spending at a healthy rate, although some of this spending may be due to pre – tariff purchases, such as cars. Businesses are still steadily adding workers, and unemployment remains low. However, there are signs that inflation could worsen in the coming months. Surveys of manufacturing and services firms show that they are experiencing higher prices from their suppliers. A survey by the Federal Reserve’s Dallas branch found that nearly 55% of manufacturing firms expect to pass on the impact of tariff increases to their customers, indicating that the Fed’s difficult balancing act in the face of tariff – related uncertainty is far from over.

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